Which Home Loan is Right for You?

When you decide to buy a house using a mortgage, you have a number of options. It's true that there are fewer options now than there were a few years ago, but there are still choices you need to make when it comes to choosing your home loan.

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Fixed Rate vs. Variable Rate

The first decision that many homebuyers have to make is whether or not they want a fixed rate loan. A fixed rate mortgage keeps the same interest rate throughout the mortgage — no matter how high the interest rate goes during the term. This means that you have a stable payment, and you don't have to worry about paying more. You know exactly what your mortgage payment will be, and you can use that as you plan your spending.

On the other hand, a variable rate mortgage is different. The lender changes the rate, depending on the market. Your rate (and your mortgage payment) changes every time your rate is reviewed and adjusted, usually every quarter. A standard variable rate often starts out lower than a comparable fixed rate, though. Because there is a chance that rates will go higher at some point during your mortgage, lenders don't mind starting them off lower.

You have to decide which you prefer. If mortgage rates end up moving higher over time, you might pay more in interest during the course of your loan than if you stuck with a fixed rate. Some homebuyers figure that they will refinance to a fixed rate, but there is no guarantee that they will be able to refinance later.

Mortgage Term

Next, you have to decide on a mortgage term. How long do you want your mortgage? You can usually choose a term of anywhere between 10 years and 40 years. However, a 30-year mortgage is the most popular type of loan. It's important to note that your interest rate depends, in part, on how long your mortgage term is.

A 15-year mortgage has a lower interest rate than a 30-year mortgage. If you want to save money on your mortgage rate, a lower term can be the answer. However, a shorter term also means a larger monthly payment. If your finances can handle the higher payment, a shorter term can save you quite a bit of money over the course of your mortgage.

One strategy that some employ is to get a mortgage with a longer term, with the lower payment, and then make extra payments toward the principal to pay off the loan faster. This provides a certain amount of flexibility. You can keep making your higher payments as long as you can, but if something happens to reduce your income, you can cut back to the lower payment without putting your home at risk.

Carefully think about your situation, and what is likely to work best for you during the entire term of your loan. Be realistic about what you can handle in terms of payment, and consider how you would handle your mortgage in the event of an unexpected change to your finances.

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